The Federal Reserve, OCC, FDIC, and NCUA have issued “Interagency Lending Principles for Offering Responsible Small-Dollar Loans.”  The agencies state that the principles are intended “to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes.”

The issuance of the guidance follows the release of a statement by the CFPB and the four federal banking agencies on March 26 that encouraged small-dollar lending in response to the COVID-19 pandemic.  In that statement, the agencies indicated that they were “working on future guidance and lending principles for responsible small-dollar loans.”

The interagency guidance describes the following characteristics of “responsible” small-dollar loan programs:

• A high percentage of customers who repay in accordance with the original loan terms
• Repayment terms, pricing, and safeguards that minimize adverse customer outcomes, including cycles of debt due to rollovers and reborrowing
• Repayment outcomes and program structures that enhance a customer’s financial capabilities

The guidance approves the use of “innovative technology or processes for customers who may not meet a financial institutions traditional underwriting standards” (referencing the December 2019 interagency statement that recognized the benefits of using alternative data in credit decisions).  It also approves the use of “effectively-managed third party relationships” to implement small-dollar loan programs.

The guidance contains the following “core principles” for offering small-dollar loans:

• Offering loan products consistent with safe and sound banking, that treat customers fairly, and that comply with applicable laws and regulations
• Effective management of credit, operational, compliance, and other risks
• Underwriting loan products based on prudent policies and practices governing amounts borrowed, borrowing frequency, and repayment terms

The agencies also identify the following areas that would generally be addressed in “reasonable loan policies and sound management practices and controls”:

• Loan amounts and repayment terms that align with eligibility and underwriting criteria and product structures, including shorter-term single payment structures, that support successful repayment in a reasonable time frame rather than reborrowing, rollovers, or immediate collectability upon default.
• Loan pricing that complies with applicable federal and state laws and reflects overall returns reasonably related to the institution’s risks and costs (including for products offered through third-party relationships).
• Underwriting that uses internal and/or external data sources, such as deposit account activity, and that can also use “effectively managed new processes, technologies, and automation to lower the cost of providing small-dollar loans.”
• Marketing and customer disclosures that comply with applicable laws and regulations and provide information in a clear, conspicuous, accurate, and customer-friendly manner.”
• Loan servicing and safeguards that include processes that assist customers to successfully repay without rollovers or reborrowing, including timely and reasonable workout strategies for customers who are unable to pay due to unexpected circumstances and restructuring of single payment loans or open-end lines of credit into installment loans.

In May 2018, the OCC issued a bulletin (2018-14) setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.  The OCC has rescinded that bulletin and issued a new bulletin (2020-25) that reflects the new interagency guidance.

The OCC’s expectations set forth in the rescinded bulletin for policies and practices to be followed by its supervised institutions in offering small-dollar loans are similar to those set forth in the interagency guidance.  However, the bulletin also contained some potentially troubling language that is not found in the interagency guidance. In the bulletin, the OCC indicated that its OCC’s “reasonable policies and practices specific to short-term, small-dollar installment lending” included “[l]oan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs.”  The OCC also stated that it “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entities licensing state(s).”

We found the OCC’s reference to “[l]oan pricing that complies with applicable state laws” to be confused (or likely to cause confusion).  Federal law (12 U.S.C. Section 85) governs the interest national banks may charge.  It authorizes banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state.  As noted above, the interagency guidance refers to “[l]oan pricing that complies with applicable federal and state laws.”

We were also concerned that the OCC’s unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits, could be read to call into question a valuable distribution channel for bank loans.  We are pleased that the interagency statement does not contain a similar statement or otherwise express an unfavorable view of bank-nonbank partnerships.  Indeed, as noted above, the interagency statement approves the use of “effectively-managed third party relationships” to implement small-dollar loan programs.

Although the FDIC published an RFI in November 2018 seeking input on steps it could take to encourage FDIC-supervised institutions to offer small-dollar credit products, the FDIC did not issue an NPRM.  In its Financial Institution Letter (FIL-58-2020) regarding the interagency guidance, the FDIC indicates that it is rescinding prior guidance on small-dollar as well as its guidance on deposit advance products (which effectively precluded FDIC-supervised institutions from offering such products) and replacing such guidance with the interagency statement.  It also indicates that it will make technical and conforming amendments to its 2015 guidelines that clarified the FDIC’s approach to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders.